Advice on contracting peanuts: Gotta know when to fold ‘em

Marketing a contract crop reminds Jay Yates, Texas Extension specialist, of a poker game. “Each player just tries to outguess the other one,” he said at a recent peanut workshop in Brownfield.

Yates, who works in risk management, knows a bit about the gambler mentality inherent in farming, but said peanut farmers should be wary of folding their hands too early if buyers offer less than they did last year.

Fundamentals of supply and demand, he said, don’t support a price drop. “The reason contracts are currently slightly lower than this time last year has more to do with the price of other commodities,” he said. “If cotton prices were higher, so would peanut contracts.”

Yates said the peanut industry has enjoyed relatively stable prices the past two years because of increased demand. “That demand is real from both domestic consumption and export sales,” he said.

Forecast usage for the 2004 crop shows gains in every category except crushing. Domestic food use estimate is up 8.8 percent; crush declines 11.4 percent; seed and residual is up 18.8 percent and exports rise 7.6 percent. Total use estimates for the 2004 crop is up 6.9 percent. Those figures reflect estimates for the 2004-2005 marketing year, August 1 through July 31.

“The fundamentals suggest 2005 prices similar to 2004; however, lower prices in other commodities will put downward pressure on farmer contract offerings. My guess is $380 a ton.”

Last year contract prices ranged from $400 to $425 per ton for runners and $465 to $500 for Virginias. Yates said prices could go higher if production problems threaten supply. But a large planted acreage leading to a crop bigger than consumption estimates could push prices lower.

Yates expects government outlays for peanuts to be small. “Since September 2002, peanut producers have not been in a position to receive loan deficiency payments,” he said.

The counter cyclical payment for the 2004 crop will be lower than in 2003, he said. The 2003 CCP hit $73. The 2004 projection is $59. Yield trends the past few years have been up nationally and in Texas, Yates said. Average yield in 2004, 3,057, was slightly below the record 2003 crop, 3,159. The 2001 national yield average was 3,029. Texas produced its best crop ever in 2001 with a 3,310 pounds per acre average.

Those large crops have added to carryover. “But it’s not a burdensome carryover like we have in cotton,” Yates said. He said the industry currently has a 25 percent stocks to use ratio. “Production is staying close to consumption,” he said.

Acreage has remained fairly consistent since the 2002 farm program eliminated the old peanut quota system. In 2004 farmers planted 1.43 million acres of peanuts; Texas farmers planted 240,000. Oklahoma had 35,000 and New Mexico had 17,000 acres. Georgia farmers planted 620,000 acres last year.

Harvest problems in the Southeast and West Texas likely affected final yield. Yates said a cost/return analysis shows peanuts to be a good option for West Texas farmers with the proper combination of experience, soil, water and equipment. Budgets show a potential $170 per acre return above variable costs for irrigated peanuts, assuming a 4,000 pounds per acre yield, a $425 per ton price and a$680 in variable costs.

That compares with a $37 per acre loss with irrigated cotton at 52 cents a pound, a 750-pound yield and $87 in variable costs. Non-irrigated cotton, at only 250-pound yield and a $215 variable cost estimate loses $64. Irrigated corn would make $37 per acre with a $2.55 per bushel price, 210 bushels per acre and $215 in variable costs. For farmers set up to grow peanuts, those odds look pretty good.